Vasquez emerged as an excellent complement to starting point guard Kyle Lowry and became a priority for the Raptors to keep this summer.
With the Vasquez agreement, Toronto has retained three of its key free agents this summer, including Lowry and Patrick Patterson.
Despite interest on the market, Vasquez's agent Arn Tellem and Toronto general manager Masai Ujiri worked out a deal without Vasquez needing to seriously pursue an offer sheet on the market.
Vasquez averaged 9.5 points and 3.7 points for the Raptors last season.
Vasquez, 27, came to the Raptors as part of the deal that sent Rudy Gay to the Sacramento Kings last season. The Raptors are his fourth team in four NBA seasons, including stops in Memphis and New Orleans.
In his best season, Vasquez averaged 13.9 points and nine assists in 2012-13 for New Orleans.